Striking a Chord

What can business ­owners learn from a couple of iconic guitar makers?
A lot, apparently

GIBSON IS A brand with a hundred-year history of building some of the world’s most popular and treasured stringed instruments, including the fabled Les Paul and SG guitars.

Fender, while a “newer” company, has been doing the same thing since the late 1940s, ­revolutionizing the manufacturing of electric instruments along the way and creating the iconic Telecaster and Stratocaster guitars, along with the legendary Precision and Jazz basses.

There are other manufacturers of professional-grade guitars, basses and amplifiers, but it’s hard to argue against Gibson and Fender being the heavy hitters on the block. In Gibson’s case, “on the block” in more ways than one.

Gibson recently filed for Chapter Eleven protection in U.S. courts when large loans came due and the company was unable to pay them back. The irony is that Gibson musical instruments continue to be profitable to make and sell, as do (mostly) their other brands like Kalamazoo, Slingerland, Baldwin, Chickering, Wurlitzer, Steinberger, Maestro, Kramer and Epiphone.

That part of the company will likely bounce back one way or another, with restructured debt, new management and a greater focus on profitable lines. But someone is going to take a massive hit when (and if) a buyer is found for the long list of money-losing electronics companies that have been operating under the Gibson corporate banner.

These companies cost Gibson tens of millions to buy and support, but failed to return the favour in profits. And the parent company has bit the dust as a result, for a while, anyway.

Lesson number one: Success in one field is no guarantor of similar results in another. Gibson prospered when it focussed on what it knew best and what the market wanted, rather than what it thought the market should want. When it stopped focussing on its core business, it lost its mojo, and efforts to become bigger did not result in it becoming better.

By contrast, Fender has generally been more market-conscious than Gibson, and their other instrument brands, Squier, Charvel, Jackson, EVH, Olympia, Orpheum, Hamer, Tacoma and licence-built Gretsch guitars have all contributed nicely to corporate revenues.

Lesson number two: Be careful what you wish for. Imagine a large and prosperous company developing a customer that regularly ordered product in multiples of millions of dollars. A dream come true. That was the situation with Fender and Guitar Center, the giant U.S. music store chain. So many millions, in fact, that when their credit got a little shaky, Fender had to keep supplying them on the tick because the deal was just too big to fail and before long there was a good-sized fortune in unpaid accounts receivable.

If Guitar Center were to fall, where would that leave Fender? The company claims it is in good financial shape, but the worldwide decline in the popularity of the guitar has hurt sales, and the loss of a customer/creditor the size of Guitar Center would be a huge blow. Even if they could recover significant unpaid inventory (by no means a sure thing), what do they do with more tens of thousands of unsold guitars? If they bulk discount them (a favourite bankers’ suggestion), they risk cannibalizing sales from their currently solvent dealers—the kiss of death for many in a shrinking and very competitive marketplace. They will have to tread very carefully for a while, or risk doing a face-plant.

Two different stories, but each one has ­something to teach the interested observer. Best of all, the lessons are not restricted to large ­corporations and may help your business, too. Jim Chapman